(updates bond yields and prices; add price/yield table.)
By Min Zeng
Investors flocked into U.S. Treasury bonds Monday as a pullback in key gauges of manufacturing in the world's two largest economies raised concerns over the global growth outlook.
Prices of the safe-harbor market rallied broadly after the Institute for Supply Management's monthly indicator of the U.S. manufacturing sector fell to 51.3 last month, the lowest level since May. Meanwhile, China reported its official manufacturing index slid to a six-month low of 50.5 in January.
The latest releases come at a time when investor sentiment about the global economy has been rattled by turmoil in developing nations and some disappointing U.S. economic releases in January.
Monday's price strength in bonds built on the biggest monthly price rally since August 2011, sending the benchmark 10-year note's yield to the lowest level since the start of November. When bond prices rise, their yields fall.
"Flight to safety remains the key trade as there is still lots of uncertainty on the economy," said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. "Everybody's head is spinning because we are basically trading on every piece of economic data."
In late-afternoon trading, the 10-year note was 22/32 higher in price compared to late Friday, yielding 2.586%, according to Tradeweb. The yield touched as low as 2.577% during Monday's session, having fallen from 3.03% at the end of last year.
Analysts said Monday's U.S. manufacturing report could add pressure on the Federal Reserve to take it slow in withdrawing monetary stimulus.
"Lately it is starting to paint a picture of an economy that is not showing as much strength as the Fed anticipated that it would," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. "If the trend continues, the Fed may have to adjust their plan for" reducing bond buying.
The Fed last week cut its monthly bond buying by $10 billion to $65 billion, following a previous $10 billion reduction. Fed officials didn't express concerns over emerging markets and still believe U.S. growth will gain traction.
Fed policy makers have signaled their intention to wind down purchases by the end of 2014. Even so, they have suggested they won't raise short-term interest rates from near zero immediately after phasing out the bond-buying program.
Some analysts said this approach would keep the rise in bond yields in check after last year's sharp increases. The 10-year note's yield rose more than one percentage point in 2013, the largest annual increase since 2009.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/4% 2-year 100 4/32 up 2/32 0.304% -3.6BP
3/4% 3-Year 100 12/32 up 5/32 0.621% -5.9BP
1 1/2% 5-year 100 10/32 up 11/32 1.435% -7.5BP
2 3/8% 7-Year 100 13/32 up 17/32 2.062% -8.2BP
2 3/4% 10-year 101 13/32 up 22/32 2.586% -8.0BP
3 3/4% 30-year 103 25/32 up 1 14/32 3.542% -7.9BP
2-10-Yr Yield Spread: +228.2 BPS Vs +231.5 BPS
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